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Hrblock Tax

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Hrblock Tax

Hrblock tax Publication 3402 - Introductory Material Table of Contents Reminder IntroductionOrdering forms and publications. Hrblock tax Tax questions. Hrblock tax Useful Items - You may want to see: Reminder Photographs of missing children. Hrblock tax  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Hrblock tax Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Hrblock tax You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Hrblock tax Introduction This publication provides federal income, employment, and excise tax information for limited liability companies. Hrblock tax This publication does not address state law governing the formation, operation, or termination of limited liability companies. Hrblock tax This publication does not address any state taxes. Hrblock tax Comments and suggestions. Hrblock tax   We welcome your comments about this publication and your suggestions for future editions. Hrblock tax   You can write to us at the following address: Internal Revenue Service Business Forms and Publications Branch SE:W:CAR:MP:T:B 1111 Constitution Ave. Hrblock tax NW, IR–6526 Washington, DC 20224   We respond to many letters by telephone. Hrblock tax Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Hrblock tax   You can email us at *taxforms@irs. Hrblock tax gov. Hrblock tax (The asterisk must be included in the address. Hrblock tax ) Please put “Publications Comment” on the subject line. Hrblock tax Although we cannot respond individually to each email, we do appreciate your feedback and will consider your comments as we revise our tax products. Hrblock tax Ordering forms and publications. Hrblock tax   Visit www. Hrblock tax irs. Hrblock tax gov/formspubs to download forms and publications, call 1-800-829-3676, or write to the address below and receive a response within 10 days after your request is received. Hrblock tax Internal Revenue Service1201 N. Hrblock tax Mitsubishi MotorwayBloomington, IL 61705-6613 Tax questions. Hrblock tax   If you have a tax question, check the information available on www. Hrblock tax irs. Hrblock tax gov or call 1-800-829-1040. Hrblock tax We cannot answer tax questions sent to either of the above addresses. Hrblock tax Useful Items - You may want to see: Publication 15 (Circular E), Employer's Tax Guide 334 Tax Guide for Small Business 505 Tax Withholding and Estimated Tax 535 Business Expenses 541 Partnerships 542 Corporations 544 Sales and Other Dispositions of Assets 583 Starting a Business and Keeping Records 925 Passive Activity and At-Risk Rules Form (and Instructions) 1065 U. Hrblock tax S. Hrblock tax Return of Partnership Income 1120 U. Hrblock tax S. Hrblock tax Corporation Income Tax Return 1120S U. Hrblock tax S. Hrblock tax Income Tax Return for an S Corporation 2553 Election by a Small Business Corporation 8832 Entity Classification Election See How To Get More Information near the end of this publication for information about getting publications and forms. Hrblock tax Prev  Up  Next   Home   More Online Publications
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The Hrblock Tax

Hrblock tax 2. Hrblock tax   Depreciation of Rental Property Table of Contents The BasicsWhat Rental Property Can Be Depreciated? When Does Depreciation Begin and End? Depreciation Methods Basis of Depreciable Property Claiming the Special Depreciation Allowance MACRS DepreciationDepreciation Systems Property Classes Under GDS Recovery Periods Under GDS Conventions Figuring Your Depreciation Deduction Figuring MACRS Depreciation Under ADS Claiming the Correct Amount of Depreciation You recover the cost of income producing property through yearly tax deductions. Hrblock tax You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. Hrblock tax Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. Hrblock tax You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures and equipment, as an expense. Hrblock tax You can deduct depreciation only on the part of your property used for rental purposes. Hrblock tax Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. Hrblock tax You may have to use Form 4562 to figure and report your depreciation. Hrblock tax See Which Forms To Use in chapter 3. Hrblock tax Also see Publication 946. Hrblock tax Section 179 deduction. Hrblock tax   The section 179 deduction is a means of recovering part or all of the cost of certain qualifying property in the year you place the property in service. Hrblock tax This deduction is not allowed for property used in connection with residential rental property. Hrblock tax See chapter 2 of Publication 946. Hrblock tax Alternative minimum tax (AMT). Hrblock tax   If you use accelerated depreciation, you may be subject to the AMT. Hrblock tax Accelerated depreciation allows you to deduct more depreciation earlier in the recovery period than you could deduct using a straight line method (same deduction each year). Hrblock tax   The prescribed depreciation methods for rental real estate are not accelerated, so the depreciation deduction is not adjusted for the AMT. Hrblock tax However, accelerated methods are generally used for other property connected with rental activities (for example, appliances and wall-to-wall carpeting). Hrblock tax   To find out if you are subject to the AMT, see the Instructions for Form 6251. Hrblock tax The Basics The following section discusses the information you will need to have about the rental property and the decisions to be made before figuring your depreciation deduction. Hrblock tax What Rental Property Can Be Depreciated? You can depreciate your property if it meets all the following requirements. Hrblock tax You own the property. Hrblock tax You use the property in your business or income-producing activity (such as rental property). Hrblock tax The property has a determinable useful life. Hrblock tax The property is expected to last more than one year. Hrblock tax Property you own. Hrblock tax   To claim depreciation, you usually must be the owner of the property. Hrblock tax You are considered as owning property even if it is subject to a debt. Hrblock tax Rented property. Hrblock tax   Generally, if you pay rent for property, you cannot depreciate that property. Hrblock tax Usually, only the owner can depreciate it. Hrblock tax However, if you make permanent improvements to leased property, you may be able to depreciate the improvements. Hrblock tax See Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. Hrblock tax Cooperative apartments. Hrblock tax   If you are a tenant-stockholder in a cooperative housing corporation and rent your cooperative apartment to others, you can deduct depreciation on your stock in the corporation. Hrblock tax See chapter 4, Special Situations. Hrblock tax Property having a determinable useful life. Hrblock tax   To be depreciable, your property must have a determinable useful life. Hrblock tax This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Hrblock tax What Rental Property Cannot Be Depreciated? Certain property cannot be depreciated. Hrblock tax This includes land and certain excepted property. Hrblock tax Land. Hrblock tax   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. Hrblock tax But if it does, the loss is accounted for upon disposition. Hrblock tax The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. Hrblock tax   Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. Hrblock tax These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property. Hrblock tax Example. Hrblock tax You built a new house to use as a rental and paid for grading, clearing, seeding, and planting bushes and trees. Hrblock tax Some of the bushes and trees were planted right next to the house, while others were planted around the outer border of the lot. Hrblock tax If you replace the house, you would have to destroy the bushes and trees right next to it. Hrblock tax These bushes and trees are closely associated with the house, so they have a determinable useful life. Hrblock tax Therefore, you can depreciate them. Hrblock tax Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. Hrblock tax Excepted property. Hrblock tax   Even if the property meets all the requirements listed earlier under What Rental Property Can Be Depreciated , you cannot depreciate the following property. Hrblock tax Property placed in service and disposed of (or taken out of business use) in the same year. Hrblock tax Equipment used to build capital improvements. Hrblock tax You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Hrblock tax For more information, see chapter 1 of Publication 946. Hrblock tax When Does Depreciation Begin and End? You begin to depreciate your rental property when you place it in service for the production of income. Hrblock tax You stop depreciating it either when you have fully recovered your cost or other basis, or when you retire it from service, whichever happens first. Hrblock tax Placed in Service You place property in service in a rental activity when it is ready and available for a specific use in that activity. Hrblock tax Even if you are not using the property, it is in service when it is ready and available for its specific use. Hrblock tax Example 1. Hrblock tax On November 22 of last year, you purchased a dishwasher for your rental property. Hrblock tax The appliance was delivered on December 7, but was not installed and ready for use until January 3 of this year. Hrblock tax Because the dishwasher was not ready for use last year, it is not considered placed in service until this year. Hrblock tax If the appliance had been installed and ready for use when it was delivered in December of last year, it would have been considered placed in service in December, even if it was not actually used until this year. Hrblock tax Example 2. Hrblock tax On April 6, you purchased a house to use as residential rental property. Hrblock tax You made extensive repairs to the house and had it ready for rent on July 5. Hrblock tax You began to advertise the house for rent in July and actually rented it beginning September 1. Hrblock tax The house is considered placed in service in July when it was ready and available for rent. Hrblock tax You can begin to depreciate the house in July. Hrblock tax Example 3. Hrblock tax You moved from your home in July. Hrblock tax During August and September you made several repairs to the house. Hrblock tax On October 1, you listed the property for rent with a real estate company, which rented it on December 1. Hrblock tax The property is considered placed in service on October 1, the date when it was available for rent. Hrblock tax Conversion to business use. Hrblock tax   If you place property in service in a personal activity, you cannot claim depreciation. Hrblock tax However, if you change the property's use to business or the production of income, you can begin to depreciate it at the time of the change. Hrblock tax You place the property in service for business or income-producing use on the date of the change. Hrblock tax Example. Hrblock tax You bought a house and used it as your personal home several years before you converted it to rental property. Hrblock tax Although its specific use was personal and no depreciation was allowable, you placed the home in service when you began using it as your home. Hrblock tax You can begin to claim depreciation in the year you converted it to rental property because at that time its use changed to the production of income. Hrblock tax Idle Property Continue to claim a deduction for depreciation on property used in your rental activity even if it is temporarily idle (not in use). Hrblock tax For example, if you must make repairs after a tenant moves out, you still depreciate the rental property during the time it is not available for rent. Hrblock tax Cost or Other Basis Fully Recovered You must stop depreciating property when the total of your yearly depreciation deductions equals your cost or other basis of your property. Hrblock tax For this purpose, your yearly depreciation deductions include any depreciation that you were allowed to claim, even if you did not claim it. Hrblock tax See Basis of Depreciable Property , later. Hrblock tax Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. Hrblock tax You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. Hrblock tax You sell or exchange the property. Hrblock tax You convert the property to personal use. Hrblock tax You abandon the property. Hrblock tax The property is destroyed. Hrblock tax Depreciation Methods Generally, you must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate residential rental property placed in service after 1986. Hrblock tax If you placed rental property in service before 1987, you are using one of the following methods. Hrblock tax ACRS (Accelerated Cost Recovery System) for property placed in service after 1980 but before 1987. Hrblock tax Straight line or declining balance method over the useful life of property placed in service before 1981. Hrblock tax See MACRS Depreciation , later, for more information. Hrblock tax Rental property placed in service before 2013. Hrblock tax   Continue to use the same method of figuring depreciation that you used in the past. Hrblock tax Use of real property changed. Hrblock tax   Generally, you must use MACRS to depreciate real property that you acquired for personal use before 1987 and changed to business or income-producing use after 1986. Hrblock tax This includes your residence that you changed to rental use. Hrblock tax See Property Owned or Used in 1986 in Publication 946, chapter 1, for those situations in which MACRS is not allowed. Hrblock tax Improvements made after 1986. Hrblock tax   Treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. Hrblock tax As a result, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. Hrblock tax For more information about improvements, see Additions or improvements to property , later in this chapter under Recovery Periods Under GDS. Hrblock tax This publication discusses MACRS depreciation only. Hrblock tax If you need information about depreciating property placed in service before 1987, see Publication 534. Hrblock tax Basis of Depreciable Property The basis of property used in a rental activity is generally its adjusted basis when you place it in service in that activity. Hrblock tax This is its cost or other basis when you acquired it, adjusted for certain items occurring before you place it in service in the rental activity. Hrblock tax If you depreciate your property under MACRS, you may also have to reduce your basis by certain deductions and credits with respect to the property. Hrblock tax Basis and adjusted basis are explained in the following discussions. Hrblock tax If you used the property for personal purposes before changing it to rental use, its basis for depreciation is the lesser of its adjusted basis or its fair market value when you change it to rental use. Hrblock tax See Basis of Property Changed to Rental Use in chapter 4. Hrblock tax Cost Basis The basis of property you buy is usually its cost. Hrblock tax The cost is the amount you pay for it in cash, in debt obligation, in other property, or in services. Hrblock tax Your cost also includes amounts you pay for: Sales tax charged on the purchase (but see Exception next), Freight charges to obtain the property, and Installation and testing charges. Hrblock tax Exception. Hrblock tax   If you deducted state and local general sales taxes as an itemized deduction on Schedule A (Form 1040), do not include those sales taxes as part of your cost basis. Hrblock tax Such taxes were deductible before 1987 and after 2003. Hrblock tax Loans with low or no interest. Hrblock tax   If you buy property on any time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, less the amount considered to be unstated interest. Hrblock tax See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. Hrblock tax Real property. Hrblock tax   If you buy real property, such as a building and land, certain fees and other expenses you pay are part of your cost basis in the property. Hrblock tax Real estate taxes. Hrblock tax   If you buy real property and agree to pay real estate taxes on it that were owed by the seller and the seller does not reimburse you, the taxes you pay are treated as part of your basis in the property. Hrblock tax You cannot deduct them as taxes paid. Hrblock tax   If you reimburse the seller for real estate taxes the seller paid for you, you can usually deduct that amount. Hrblock tax Do not include that amount in your basis in the property. Hrblock tax Settlement fees and other costs. Hrblock tax   The following settlement fees and closing costs for buying the property are part of your basis in the property. Hrblock tax Abstract fees. Hrblock tax Charges for installing utility services. Hrblock tax Legal fees. Hrblock tax Recording fees. Hrblock tax Surveys. Hrblock tax Transfer taxes. Hrblock tax Title insurance. Hrblock tax Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Hrblock tax   The following are settlement fees and closing costs you cannot include in your basis in the property. Hrblock tax Fire insurance premiums. Hrblock tax Rent or other charges relating to occupancy of the property before closing. Hrblock tax Charges connected with getting or refinancing a loan, such as: Points (discount points, loan origination fees), Mortgage insurance premiums, Loan assumption fees, Cost of a credit report, and Fees for an appraisal required by a lender. Hrblock tax   Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Hrblock tax Assumption of a mortgage. Hrblock tax   If you buy property and become liable for an existing mortgage on the property, your basis is the amount you pay for the property plus the amount remaining to be paid on the mortgage. Hrblock tax Example. Hrblock tax You buy a building for $60,000 cash and assume a mortgage of $240,000 on it. Hrblock tax Your basis is $300,000. Hrblock tax Separating cost of land and buildings. Hrblock tax   If you buy buildings and your cost includes the cost of the land on which they stand, you must divide the cost between the land and the buildings to figure the basis for depreciation of the buildings. Hrblock tax The part of the cost that you allocate to each asset is the ratio of the fair market value of that asset to the fair market value of the whole property at the time you buy it. Hrblock tax   If you are not certain of the fair market values of the land and the buildings, you can divide the cost between them based on their assessed values for real estate tax purposes. Hrblock tax Example. Hrblock tax You buy a house and land for $200,000. Hrblock tax The purchase contract does not specify how much of the purchase price is for the house and how much is for the land. Hrblock tax The latest real estate tax assessment on the property was based on an assessed value of $160,000, of which $136,000 was for the house and $24,000 was for the land. Hrblock tax You can allocate 85% ($136,000 ÷ $160,000) of the purchase price to the house and 15% ($24,000 ÷ $160,000) of the purchase price to the land. Hrblock tax Your basis in the house is $170,000 (85% of $200,000) and your basis in the land is $30,000 (15% of $200,000). Hrblock tax Basis Other Than Cost You cannot use cost as a basis for property that you received: In return for services you performed; In an exchange for other property; As a gift; From your spouse, or from your former spouse as the result of a divorce; or As an inheritance. Hrblock tax If you received property in one of these ways, see Publication 551 for information on how to figure your basis. Hrblock tax Adjusted Basis To figure your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service for business or the production of income. Hrblock tax The result of these adjustments to the basis is the adjusted basis. Hrblock tax Increases to basis. Hrblock tax   You must increase the basis of any property by the cost of all items properly added to a capital account. Hrblock tax These include the following. Hrblock tax The cost of any additions or improvements made before placing your property into service as a rental that have a useful life of more than 1 year. Hrblock tax Amounts spent after a casualty to restore the damaged property. Hrblock tax The cost of extending utility service lines to the property. Hrblock tax Legal fees, such as the cost of defending and perfecting title, or settling zoning issues. Hrblock tax Additions or improvements. Hrblock tax   Add to the basis of your property the amount an addition or improvement actually cost you, including any amount you borrowed to make the addition or improvement. Hrblock tax This includes all direct costs, such as material and labor, but does not include your own labor. Hrblock tax It also includes all expenses related to the addition or improvement. Hrblock tax   For example, if you had an architect draw up plans for remodeling your property, the architect's fee is a part of the cost of the remodeling. Hrblock tax Or, if you had your lot surveyed to put up a fence, the cost of the survey is a part of the cost of the fence. Hrblock tax   Keep separate accounts for depreciable additions or improvements made after you place the property in service in your rental activity. Hrblock tax For information on depreciating additions or improvements, see Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. Hrblock tax    The cost of landscaping improvements is usually treated as an addition to the basis of the land, which is not depreciable. Hrblock tax However, see What Rental Property Cannot Be Depreciated, earlier. Hrblock tax Assessments for local improvements. Hrblock tax   Assessments for items which tend to increase the value of property, such as streets and sidewalks, must be added to the basis of the property. Hrblock tax For example, if your city installs curbing on the street in front of your house, and assesses you and your neighbors for its cost, you must add the assessment to the basis of your property. Hrblock tax Also add the cost of legal fees paid to obtain a decrease in an assessment levied against property to pay for local improvements. Hrblock tax You cannot deduct these items as taxes or depreciate them. Hrblock tax    However, you can deduct as taxes, charges or assessments for maintenance, repairs, or interest charges related to the improvements. Hrblock tax Do not add them to your basis in the property. Hrblock tax Deducting vs. Hrblock tax capitalizing costs. Hrblock tax   Do not add to your basis costs you can deduct as current expenses. Hrblock tax However, there are certain costs you can choose either to deduct or to capitalize. Hrblock tax If you capitalize these costs, include them in your basis. Hrblock tax If you deduct them, do not include them in your basis. Hrblock tax   The costs you may choose to deduct or capitalize include carrying charges, such as interest and taxes, that you must pay to own property. Hrblock tax   For more information about deducting or capitalizing costs and how to make the election, see Carrying Charges in Publication 535, chapter 7. Hrblock tax Decreases to basis. Hrblock tax   You must decrease the basis of your property by any items that represent a return of your cost. Hrblock tax These include the following. Hrblock tax Insurance or other payment you receive as the result of a casualty or theft loss. Hrblock tax Casualty loss not covered by insurance for which you took a deduction. Hrblock tax Amount(s) you receive for granting an easement. Hrblock tax Residential energy credits you were allowed before 1986, or after 2005, if you added the cost of the energy items to the basis of your home. Hrblock tax Exclusion from income of subsidies for energy conservation measures. Hrblock tax Special depreciation allowance claimed on qualified property. Hrblock tax Depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. Hrblock tax If you did not deduct enough or deducted too much in any year, see Depreciation under Decreases to Basis in Publication 551. Hrblock tax   If your rental property was previously used as your main home, you must also decrease the basis by the following. Hrblock tax Gain you postponed from the sale of your main home before May 7, 1997, if the replacement home was converted to your rental property. Hrblock tax District of Columbia first-time homebuyer credit allowed on the purchase of your main home after August 4, 1997 and before January 1, 2012. Hrblock tax Amount of qualified principal residence indebtedness discharged on or after January 1, 2007. Hrblock tax Claiming the Special Depreciation Allowance For 2013, your residential rental property may qualify for a special depreciation allowance. Hrblock tax This allowance is figured before you figure your regular depreciation deduction. Hrblock tax See Publication 946, chapter 3, for details. Hrblock tax Also see the Instructions for Form 4562, Line 14. Hrblock tax If you qualify for, but choose not to take, a special depreciation allowance, you must attach a statement to your return. Hrblock tax The details of this election are in Publication 946, chapter 3, and the Instructions for Form 4562, Line 14. Hrblock tax MACRS Depreciation Most business and investment property placed in service after 1986 is depreciated using MACRS. Hrblock tax This section explains how to determine which MACRS depreciation system applies to your property. Hrblock tax It also discusses other information you need to know before you can figure depreciation under MACRS. Hrblock tax This information includes the property's: Recovery class, Applicable recovery period, Convention, Placed-in-service date, Basis for depreciation, and Depreciation method. Hrblock tax Depreciation Systems MACRS consists of two systems that determine how you depreciate your property—the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Hrblock tax You must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Hrblock tax Excluded Property You cannot use MACRS for certain personal property (such as furniture or appliances) placed in service in your rental property in 2013 if it had been previously placed in service before 1987 when MACRS became effective. Hrblock tax In most cases, personal property is excluded from MACRS if you (or a person related to you) owned or used it in 1986 or if your tenant is a person (or someone related to the person) who owned or used it in 1986. Hrblock tax However, the property is not excluded if your 2013 deduction under MACRS (using a half-year convention) is less than the deduction you would have under ACRS. Hrblock tax For more information, see What Method Can You Use To Depreciate Your Property? in Publication 946, chapter 1. Hrblock tax Electing ADS If you choose, you can use the ADS method for most property. Hrblock tax Under ADS, you use the straight line method of depreciation. Hrblock tax The election of ADS for one item in a class of property generally applies to all property in that class that is placed in service during the tax year of the election. Hrblock tax However, the election applies on a property-by-property basis for residential rental property and nonresidential real property. Hrblock tax If you choose to use ADS for your residential rental property, the election must be made in the first year the property is placed in service. Hrblock tax Once you make this election, you can never revoke it. Hrblock tax For property placed in service during 2013, you make the election to use ADS by entering the depreciation on Form 4562, Part III, Section C, line 20c. Hrblock tax Property Classes Under GDS Each item of property that can be depreciated under MACRS is assigned to a property class, determined by its class life. Hrblock tax The property class generally determines the depreciation method, recovery period, and convention. Hrblock tax The property classes under GDS are: 3-year property, 5-year property, 7-year property, 10-year property, 15-year property, 20-year property, Nonresidential real property, and Residential rental property. Hrblock tax Under MACRS, property that you placed in service during 2013 in your rental activities generally falls into one of the following classes. Hrblock tax 5-year property. Hrblock tax This class includes computers and peripheral equipment, office machinery (typewriters, calculators, copiers, etc. Hrblock tax ), automobiles, and light trucks. Hrblock tax This class also includes appliances, carpeting, furniture, etc. Hrblock tax , used in a residential rental real estate activity. Hrblock tax Depreciation on automobiles, other property used for transportation, computers and related peripheral equipment, and property of a type generally used for entertainment, recreation, or amusement is limited. Hrblock tax See chapter 5 of Publication 946. Hrblock tax 7-year property. Hrblock tax This class includes office furniture and equipment (desks, file cabinets, etc. Hrblock tax ). Hrblock tax This class also includes any property that does not have a class life and that has not been designated by law as being in any other class. Hrblock tax 15-year property. Hrblock tax This class includes roads, fences, and shrubbery (if depreciable). Hrblock tax Residential rental property. Hrblock tax This class includes any real property that is a rental building or structure (including a mobile home) for which 80% or more of the gross rental income for the tax year is from dwelling units. Hrblock tax It does not include a unit in a hotel, motel, inn, or other establishment where more than half of the units are used on a transient basis. Hrblock tax If you live in any part of the building or structure, the gross rental income includes the fair rental value of the part you live in. Hrblock tax The other property classes do not generally apply to property used in rental activities. Hrblock tax These classes are not discussed in this publication. Hrblock tax See Publication 946 for more information. Hrblock tax Recovery Periods Under GDS The recovery period of property is the number of years over which you recover its cost or other basis. Hrblock tax The recovery periods are generally longer under ADS than GDS. Hrblock tax The recovery period of property depends on its property class. Hrblock tax Under GDS, the recovery period of an asset is generally the same as its property class. Hrblock tax Class lives and recovery periods for most assets are listed in Appendix B of Publication 946. Hrblock tax See Table 2-1 for recovery periods of property commonly used in residential rental activities. Hrblock tax Qualified Indian reservation property. Hrblock tax   Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations. Hrblock tax For more information, see chapter 4 of Publication 946. Hrblock tax Additions or improvements to property. Hrblock tax   Treat additions or improvements you make to your depreciable rental property as separate property items for depreciation purposes. Hrblock tax   The property class and recovery period of the addition or improvement is the one that would apply to the original property if you had placed it in service at the same time as the addition or improvement. Hrblock tax   The recovery period for an addition or improvement to property begins on the later of: The date the addition or improvement is placed in service, or The date the property to which the addition or improvement was made is placed in service. Hrblock tax Example. Hrblock tax You own a residential rental house that you have been renting since 1986 and depreciating under ACRS. Hrblock tax You built an addition onto the house and placed it in service in 2013. Hrblock tax You must use MACRS for the addition. Hrblock tax Under GDS, the addition is depreciated as residential rental property over 27. Hrblock tax 5 years. Hrblock tax Table 2-1. Hrblock tax MACRS Recovery Periods for Property Used in Rental Activities   MACRS Recovery Period   Type of Property General Depreciation System Alternative Depreciation System   Computers and their peripheral equipment 5 years 5 years   Office machinery, such as: Typewriters Calculators Copiers 5 years 6 years   Automobiles 5 years 5 years   Light trucks 5 years 5 years   Appliances, such as: Stoves Refrigerators 5 years 9 years   Carpets 5 years 9 years   Furniture used in rental property 5 years 9 years   Office furniture and equipment, such as: Desks Files 7 years 10 years   Any property that does not have a class life and that has not been designated by law as being in any other class 7 years 12 years   Roads 15 years 20 years   Shrubbery 15 years 20 years   Fences 15 years 20 years   Residential rental property (buildings or structures) and structural components such as furnaces, waterpipes, venting, etc. Hrblock tax 27. Hrblock tax 5 years 40 years   Additions and improvements, such as a new roof The same recovery period as that of the property to which the addition or improvement is made, determined as if the property were placed in service at the same time as the addition or improvement. Hrblock tax   Conventions A convention is a method established under MACRS to set the beginning and end of the recovery period. Hrblock tax The convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year you dispose of the property. Hrblock tax Mid-month convention. Hrblock tax    A mid-month convention is used for all residential rental property and nonresidential real property. Hrblock tax Under this convention, you treat all property placed in service, or disposed of, during any month as placed in service, or disposed of, at the midpoint of that month. Hrblock tax Mid-quarter convention. Hrblock tax   A mid-quarter convention must be used if the mid-month convention does not apply and the total depreciable basis of MACRS property placed in service in the last 3 months of a tax year (excluding nonresidential real property, residential rental property, and property placed in service and disposed of in the same year) is more than 40% of the total basis of all such property you place in service during the year. Hrblock tax   Under this convention, you treat all property placed in service, or disposed of, during any quarter of a tax year as placed in service, or disposed of, at the midpoint of the quarter. Hrblock tax Example. Hrblock tax During the tax year, Tom Martin purchased the following items to use in his rental property. Hrblock tax He elects not to claim the special depreciation allowance discussed earlier. Hrblock tax A dishwasher for $400 that he placed in service in January. Hrblock tax Used furniture for $100 that he placed in service in September. Hrblock tax A refrigerator for $800 that he placed in service in October. Hrblock tax Tom uses the calendar year as his tax year. Hrblock tax The total basis of all property placed in service that year is $1,300. Hrblock tax The $800 basis of the refrigerator placed in service during the last 3 months of his tax year exceeds $520 (40% × $1,300). Hrblock tax Tom must use the mid-quarter convention instead of the half-year convention for all three items. Hrblock tax Half-year convention. Hrblock tax    The half-year convention is used if neither the mid-quarter convention nor the mid-month convention applies. Hrblock tax Under this convention, you treat all property placed in service, or disposed of, during a tax year as placed in service, or disposed of, at the midpoint of that tax year. Hrblock tax   If this convention applies, you deduct a half year of depreciation for the first year and the last year that you depreciate the property. Hrblock tax You deduct a full year of depreciation for any other year during the recovery period. Hrblock tax Figuring Your Depreciation Deduction You can figure your MACRS depreciation deduction in one of two ways. Hrblock tax The deduction is substantially the same both ways. Hrblock tax You can either: Actually compute the deduction using the depreciation method and convention that apply over the recovery period of the property, or Use the percentage from the MACRS percentage tables. Hrblock tax In this publication we will use the percentage tables. Hrblock tax For instructions on how to compute the deduction, see chapter 4 of Publication 946. Hrblock tax Residential rental property. Hrblock tax   You must use the straight line method and a mid-month convention for residential rental property. Hrblock tax In the first year that you claim depreciation for residential rental property, you can claim depreciation only for the number of months the property is in use, and you must use the mid-month convention (explained under Conventions , earlier). Hrblock tax 5-, 7-, or 15-year property. Hrblock tax   For property in the 5- or 7-year class, use the 200% declining balance method and a half-year convention. Hrblock tax However, in limited cases you must use the mid-quarter convention, if it applies. Hrblock tax For property in the 15-year class, use the 150% declining balance method and a half-year convention. Hrblock tax   You can also choose to use the 150% declining balance method for property in the 5- or 7-year class. Hrblock tax The choice to use the 150% method for one item in a class of property applies to all property in that class that is placed in service during the tax year of the election. Hrblock tax You make this election on Form 4562. Hrblock tax In Part III, column (f), enter “150 DB. Hrblock tax ” Once you make this election, you cannot change to another method. Hrblock tax   If you use either the 200% or 150% declining balance method, you figure your deduction using the straight line method in the first tax year that the straight line method gives you an equal or larger deduction. Hrblock tax   You can also choose to use the straight line method with a half-year or mid-quarter convention for 5-, 7-, or 15-year property. Hrblock tax The choice to use the straight line method for one item in a class of property applies to all property in that class that is placed in service during the tax year of the election. Hrblock tax You elect the straight line method on Form 4562. Hrblock tax In Part III, column (f), enter “S/L. Hrblock tax ” Once you make this election, you cannot change to another method. Hrblock tax MACRS Percentage Tables You can use the percentages in Table 2-2, earlier, to compute annual depreciation under MACRS. Hrblock tax The tables show the percentages for the first few years or until the change to the straight line method is made. Hrblock tax See Appendix A of Publication 946 for complete tables. Hrblock tax The percentages in Tables 2-2a, 2-2b, and 2-2c make the change from declining balance to straight line in the year that straight line will give a larger deduction. Hrblock tax If you elect to use the straight line method for 5-, 7-, or 15-year property, or the 150% declining balance method for 5- or 7-year property, use the tables in Appendix A of Publication 946. Hrblock tax How to use the percentage tables. Hrblock tax   You must apply the table rates to your property's unadjusted basis (defined below) each year of the recovery period. Hrblock tax   Once you begin using a percentage table to figure depreciation, you must continue to use it for the entire recovery period unless there is an adjustment to the basis of your property for a reason other than: Depreciation allowed or allowable, or An addition or improvement that is depreciated as a separate item of property. Hrblock tax   If there is an adjustment for any reason other than (1) or (2), for example, because of a deductible casualty loss, you can no longer use the table. Hrblock tax For the year of the adjustment and for the remaining recovery period, figure depreciation using the property's adjusted basis at the end of the year and the appropriate depreciation method, as explained earlier under Figuring Your Depreciation Deduction . Hrblock tax See Figuring the Deduction Without Using the Tables in Publication 946, chapter 4. Hrblock tax Unadjusted basis. Hrblock tax   This is the same basis you would use to figure gain on a sale (see Basis of Depreciable Property , earlier), but without reducing your original basis by any MACRS depreciation taken in earlier years. Hrblock tax   However, you do reduce your original basis by other amounts claimed on the property, including: Any amortization, Any section 179 deduction, and Any special depreciation allowance. Hrblock tax For more information, see chapter 4 of Publication 946. Hrblock tax Please click here for the text description of the image. Hrblock tax Table 2-2 Tables 2-2a, 2-2b, and 2-2c. Hrblock tax   The percentages in these tables take into account the half-year and mid-quarter conventions. Hrblock tax Use Table 2-2a for 5-year property, Table 2-2b for 7-year property, and Table 2-2c for 15-year property. Hrblock tax Use the percentage in the second column (half-year convention) unless you are required to use the mid-quarter convention (explained earlier). Hrblock tax If you must use the mid-quarter convention, use the column that corresponds to the calendar year quarter in which you placed the property in service. Hrblock tax Example 1. Hrblock tax You purchased a stove and refrigerator and placed them in service in June. Hrblock tax Your basis in the stove is $600 and your basis in the refrigerator is $1,000. Hrblock tax Both are 5-year property. Hrblock tax Using the half-year convention column in Table 2-2a, the depreciation percentage for Year 1 is 20%. Hrblock tax For that year your depreciation deduction is $120 ($600 × . Hrblock tax 20) for the stove and $200 ($1,000 × . Hrblock tax 20) for the refrigerator. Hrblock tax For Year 2, the depreciation percentage is 32%. Hrblock tax That year's depreciation deduction will be $192 ($600 × . Hrblock tax 32) for the stove and $320 ($1,000 × . Hrblock tax 32) for the refrigerator. Hrblock tax Example 2. Hrblock tax Assume the same facts as in Example 1, except you buy the refrigerator in October instead of June. Hrblock tax Since the refrigerator was placed in service in the last 3 months of the tax year, and its basis ($1,000) is more than 40% of the total basis of all property placed in service during the year ($1,600 × . Hrblock tax 40 = $640), you are required to use the mid-quarter convention to figure depreciation on both the stove and refrigerator. Hrblock tax Because you placed the refrigerator in service in October, you use the fourth quarter column of Table 2-2a and find the depreciation percentage for Year 1 is 5%. Hrblock tax Your depreciation deduction for the refrigerator is $50 ($1,000 x . Hrblock tax 05). Hrblock tax Because you placed the stove in service in June, you use the second quarter column of Table 2-2a and find the depreciation percentage for Year 1 is 25%. Hrblock tax For that year, your depreciation deduction for the stove is $150 ($600 x . Hrblock tax 25). Hrblock tax Table 2-2d. Hrblock tax    Use this table when you are using the GDS 27. Hrblock tax 5 year option for residential rental property. Hrblock tax Find the row for the month that you placed the property in service. Hrblock tax Use the percentages listed for that month to figure your depreciation deduction. Hrblock tax The mid-month convention is taken into account in the percentages shown in the table. Hrblock tax Continue to use the same row (month) under the column for the appropriate year. Hrblock tax Example. Hrblock tax You purchased a single family rental house for $185,000 and placed it in service on February 8. Hrblock tax The sales contract showed that the building cost $160,000 and the land cost $25,000. Hrblock tax Your basis for depreciation is its original cost, $160,000. Hrblock tax This is the first year of service for your residential rental property and you decide to use GDS which has a recovery period of 27. Hrblock tax 5 years. Hrblock tax Using Table 2-2d, you find that the percentage for property placed in service in February of Year 1 is 3. Hrblock tax 182%. Hrblock tax That year's depreciation deduction is $5,091 ($160,000 x . Hrblock tax 03182). Hrblock tax Figuring MACRS Depreciation Under ADS Table 2–1, earlier, shows the ADS recovery periods for property used in rental activities. Hrblock tax See Appendix B in Publication 946 for other property. Hrblock tax If your property is not listed in Appendix B, it is considered to have no class life. Hrblock tax Under ADS, personal property with no class life is depreciated using a recovery period of 12 years. Hrblock tax Use the mid-month convention for residential rental property and nonresidential real property. Hrblock tax For all other property, use the half-year or mid-quarter convention, as appropriate. Hrblock tax See Publication 946 for ADS depreciation tables. Hrblock tax Claiming the Correct Amount of Depreciation You should claim the correct amount of depreciation each tax year. Hrblock tax If you did not claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted. Hrblock tax For more information, see Depreciation under Decreases to Basis in Publication 551. Hrblock tax If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction by filing Form 1040X, Amended U. Hrblock tax S. Hrblock tax Individual Income Tax Return. Hrblock tax If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of depreciation. Hrblock tax Filing an amended return. Hrblock tax   You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Hrblock tax You claimed the incorrect amount because of a mathematical error made in any year. Hrblock tax You claimed the incorrect amount because of a posting error made in any year. Hrblock tax You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. Hrblock tax You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Hrblock tax   Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return for the property used in your rental activity. Hrblock tax This also occurs when you use the same impermissible method of determining depreciation (for example, using the wrong MACRS recovery period) in two or more consecutively filed tax returns. Hrblock tax   If an amended return is allowed, you must file it by the later of the following dates. Hrblock tax 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Hrblock tax A return filed before an unextended due date is considered filed on that due date. Hrblock tax 2 years from the time you paid your tax for that year. Hrblock tax Changing your accounting method. Hrblock tax   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. Hrblock tax In some instances, that consent is automatic. Hrblock tax For more information, see Changing Your Accounting Method in Publication 946,  chapter 1. Hrblock tax Prev  Up  Next   Home   More Online Publications